In transactions in which money is lent to a borrower, the borrower often desires to have the loan collateralized so that the borrower can borrow the money on better terms. In such a case, the borrower pledges an asset as security to the lender such that, if the borrower defaults, the lender may take possession of the asset to satisfy any unpaid loan amounts. Various financial services entities often offer debit or margin financing to its customers and the customers often use various securities as collateral for the financing.
In such cases, the financial services entity determines an interest rate to apply to the borrowed money (i.e., the debit amount). The interest rate may be based on the type of collateral (usually securities) that is offered as security by the borrower. Oftentimes the collateral offered by the borrower varies in nature and quality and the interest rate that is set by the financial services entity may have little or no correlation with the types of collateral that are being offered.